According to e-commerce market research from PipeCandy, there are approximately 110,000 to 120,000 direct-to-consumer businesses in the U.S., which garner about 13 percent of total online sales. And retail analysts expect that number to rise as online sales continue to swell.
In a “State of the Industry Report,” PipeCandy takes a deep dive into the d-to-c e-commerce space with the data and trends driving its growth. Here, Ashwin Ramasamy, cofounder of PipeCandy, shares his insights into the d-to-c market and how it has evolved.
WWD: How has the d-to-c market changed over the past few years? And what’s driving growth?
Ashwin Ramasamy: The last decade has seen the explosive rise, evolution and continued growth of d-to-c commerce.
Digital native brands, the likes of Bonobos, Warby Parker and Casper, contributed to the growth of direct-to-consumer as a business strategy. They used social media, websites and apps to manage their consumer engagement and overall customer experience while also gaining control over the product, marketing and customer acquisition costs by cutting out intermediaries. D-to-c as a strategy has since been iterated, evolved, innovated, and has now come to mean both a business model and a channel strategy.
D-to-c is no longer restricted to digital-first or digital-native brands. In the last five years, between 2016 and 2021, at least 15 d-to-c companies have gone public, and not all of them remained completely digital by the time they launched their IPO. All of them continue to have significant direct online sales channels but many eschewed the digital-only tag, opening physical stores. Some of them were also selling on Amazon or Etsy or on partner sites while some went truly omnichannel by partly distributing via wholesale.
The meaning of d-to-c has expanded. It no longer means only brands that sell through their own direct online channel. Today, small brands sell on Amazon and also have their own Shopify presence. Big retail-first brands like Nike, Pepsi or Apple — all have their own online d-to-c presence.
This rise of d-to-c has been driven by four significant developments.
The first development was the growth of the Shopify ecosystem that enabled small and emerging brands to set up e-commerce sites painlessly. The e-commerce site serves both as “the brand” (a destination that conveys the brand’s story and mission, style and values) as well as “the store” (that showcases products, enables purchase transactions and service capabilities). Technology, logistics, payments and even banking — you name a hard problem a brand has to solve — the Shopify platform solves it for them today.
The second was Facebook and its social media ecosystem that gave small brands a platform to scale digital marketing and consumer engagement without having to work via agencies, publishers and other intermediaries. Facebook has subsequently turned the screws on its pay-to-play distribution reach, which has increased the shopper acquisition costs for brands, but its impact on the initial growth of d-to-c business cannot be denied.
The third is the oft-overlooked shipping and fulfillment ecosystem. The maturity of fulfillment products such as free shipping, same-day delivery and free returns offered by 3PLs and last-mile shippers have shaped how d-to-c brands operate.
The fourth, and more recent, development coincides with the liberal credit liquidity in the market. On one hand, brands have access to venture capital and off-balance-sheet financing to fund their business growth. On the other hand, online consumer financing such as the buy now, pay later movement has accelerated the consumer adoption of brands.
WWD: What other trends are you seeing with d-to-c?
A.R.: Here are some of the other trends that we are seeing in the d-to-c space:
• Growth in shipping speed: In 2019, we saw that around 26 percent of SMBs offered next-day delivery. PipeCandy data shows that this number has now gone up to 41 percent.
As per PipeCandy data, at least 25 percent of all d-to-c businesses offer next-day and two-day delivery, and this number goes up to 30 percent for mid-market brands.
• Google Ad spend: PipeCandy data indicates that more than 60 percent of the d-to-c companies did not spend on Google Ads in the last 12 months. Of the businesses that spend on Google Ads, more than 80 percent spend less than $5,000 per month on it, and 76 percent of them receive fewer than 500,000 visitors per month.
Enterprise businesses with d-to-c channels dominate Google Ads, spending six to eight times the budgets of mid-market brands and many times over that of the long-tail e-commerce businesses. Of these, businesses with physical stores have 1.8 times higher budgets on Google Ads than large digital native brands.
• Social media presence of d-to-c brand: Around 75 percent of the brands in our sample of 10,797 d-to-c businesses have an account on at least three or more platforms, while at least 44 percent have four or more accounts.
WWD: What are some of the top categories? And how many d-to-c sites are there in the U.S.?
A.R.: Over 75 percent of the d-to-c brands in the U.S. today fall in one of the three categories — fashion and apparel; home and garden, and food and beverage. Fashion and apparel include women’s fashion, men’s fashion, jewelry and watches, headwear, footwear, eyewear, bags and wallets, and other subcategories.
We believe there are around 110,000 to 120,000 d-to-c businesses in the U.S., making up about 13 percent of all e-commerce businesses in the U.S.
WWD: In the U.S., where are d-to-c brands based? And do they have a physical presence, too?
A.R.: About 55 percent of the total d-to-c market in the U.S. is concentrated in just five states. California has the highest number of d-to-c firms with 26 percent, followed by New York with 15 percent, and Florida with about 6 percent of d-to-c firms headquartered in the state. The states of West Virginia, North Dakota, Alaska and the Virgin Islands are each home to less than 0.10 percent of the d-to-c brands.
Firms in product categories such as “Book Stores,” “Hobbies and Interests” and “Adult” have a stronger physical presence compared with brands in product categories like “Gifts and Novelties,” “Health and Fitness” and “Office Supplies and Stationery,” which don’t invest much in maintaining a solid physical presence.
WWD: So, these are small businesses with an online presence. Does this connect with the “Great Resignation” and people leaving their jobs and starting their own business?
A.R.: The Great Resignation is a result of pandemic-influenced location flexibility and liquidity. If there is any resulting increase in people coming up with brands, it will be temporary.
In fact, with rising shipping costs, disrupted supply chain and increasingly imprecise digital targeting, the odds are loaded against small brands.